Businessweek Archives

The Yield Game

December 05, 1993

Cover Story

THE YIELD GAME

"High Yields Without High Risk!"

So reads a recent ad in The New York Times for the Dreyfus Short-Term Income Fund. And that also neatly sums up the most daunting challenge facing the investing public today: How do you get high yields in a low-yield era?

Welcome to the Yield Game. Investors are being forced to play--and for the most part, they're losing.

There are so many ways to lose. High-fee, minirate bank accounts have become a standard part of the cash-management landscape despite far more attractive alternatives. Mortgage-backed securities are a mine field for even the most sophisticated investors (page 150). But probably the most painful way to lose the Yield Game is to swallow the conventional wisdom on Wall Street--that it's foolhardy to reach for yield by buying fixed-income securities and high-dividend stocks.

SAFETY FIRST. It's an argument that has been fed by the inflation jitters of recent days, which have seen rates climb because of better-than-expected economic growth numbers. The Street's rationale is that inflation is just over the horizon and will cause principal values to decline. It's an argument that used to make sense. But the pursuit of high income, as an end in itself, is a smart strategy nowadays. The threat of inflation will occasionally result in rate upticks--but don't be deterred. This is, after all, an era of disinflation, in which low interest rates are likely to last for the foreseeable future. With global competition dampening prices across the board, interest rates should stay flat, reducing the threat to total returns from declining asset values.

Of course, there are plenty of potential pitfalls in the hunt for yields. Some of the highest-yielding investments, such as junk bonds and mortgage portfolios, carry with them unacceptably high risks. Real estate investment trusts, which are among the highest-yielding equities, are likewise rife with peril. And 30-year Treasuries would lose market value if interest rates were to suddenly climb. Still, you can get steady, reliable yields that more than compensate you for the risks you take. Indeed, rates that were mouth-watering in even the "good old days"--8% or better for some safe, high-yielding stocks and bonds--are not out of reach. And such income can be realized without putting capital at unreasonable risk. Notes Fred Quirsfeld, manager of the $2.5 billion IDS Bond Fund: "In this interest-rate environment, you're better off focusing on investments with high incremental rates over Treasuries."

In the pages that follow, BUSINESS WEEK sets forth a comprehensive plan for playing the Yield Game and winning. We've divided the playing field into five territories: Negligible Risk, Low Risk, Moderate Risk, High Risk, and Unacceptable Risk. Everybody ventures into the first territory, for even high-rollers keep money in the till while waiting for opportunities to arise. But the way to win the Yield Game is to expand your risk horizons--while keeping an eye peeled for the tax collector.

When it comes to managing risk, investors are notoriously chicken-hearted. For decades, fixed-income investors, haunted by the Great Depression, clung to the "safety" of government bonds and shunned risk. The results were disastrous: From 1940 to 1980, as inflation accelerated, interest rates increased and undercut the principal value of their creditworthy bonds. Government bonds earned a 2.3% total annual return, while inflation weighed in at 4.3%, according to Ibbotson Associates.

NEW MATH. With inflation on the wane worldwide, the time is ripe to move into income-producing investments with longer maturities. "Most individuals' investment horizons are longer than a couple of years," says Ron Ryan of Ryan Labs Inc., a fixed-income research firm. "But they try to meet it with short-term investments. Mathematically, it's not going to work. You have to go for longer maturities." This is especially true for cash in 401(k) and retirement plans.

How risk-averse have investors become? One indication is a recent study conducted by the Gallup organization for the Employee Benefit Research Institute. It found that a whopping 69% of investors favored low-risk, low-return investments, while 25% were willing to take high risks. No wonder money-market funds are oversaturated with cash even as money-market and bank rates have gone into a tailspin. During the 12-month period that ended Sept. 30, passbook and money-market deposit accounts actually grew by 4.3%, to $1.2 trillion, and money-market mutual-fund assets declined by a mere 1%.

Emerging from the money-market womb would be painful for most investors--but it's overdue. And with the economy's gradual improvement, it's also a good idea to move a little lower on the credit-quality spectrum. As business improves, so does borrowers' ability to meet their obligations. Likewise, income-seeking investors should consider tax-free investments, whose benefits have never been so evident. Tax-free money-market mutual funds, bond funds, and individual munis offer yields that frequently beat the equivalent payouts--adjusted for taxes--of taxable instruments. A municipal money-market fund yielding 2.5% is equal to a taxable fund yielding 3.9% for those in the 36% tax bracket.

The search for higher yields can be as simple as switching from a money-wasting checking account to a top-drawer money-market fund. Whatever path you take, don't be spooked by inflation worrywarts. Even total-return-oriented pros agree that a continued disinflationary environment argues in favor of income-oriented investments. Frederick B. Taylor, chief investment officer at U.S. Trust Co. and a stern critic of yield-oriented strategies, observes that "if it's a given that rates will stay where they are, it takes a lot of the risk out of high-yield investments."

Safety and yield--the two are not incompatible. Here's how to get one while not sacrificing the other.

NEGLIGIBLE RISK:

MAKING THE MOST OF MEAGER RATES

The collapse in interest rates has decimated returns gn supersafe cashlike accounts. Microscopic yields on checking, money-market deposits, certificates of deposit, and money-market mutual funds have prompted millions of people to move their money into longer-term investments. But there are also millions who shun all forms of risk and have left more than $1 trillion in these accounts, losing billions each year in interest.

Almost everybody needs a bank account, and bankers understand this well--they've slashed their rates the most. In April, 1989, the average yield on interest-bearing checking accounts was 5.15%. Today, it's a scant 1.65%--a 68% decline. That's nearly twice the percentage decline in yield on long-term bonds over that same period.

People don't have to settle for what the local bank is paying. They can increase their yields with no loss of safety by moving money to out-of-town banks or money-market mutual funds. That's a jarring thought, particularly for risk averse individuals. "People like to be able to 'visit' their money," says Robert Heady, publisher of Bank Rate Monitor in North Palm Beach, Fla. "But there's no less safety in a bank 2,000 miles from home than one that's down the street."

So don't hesitate to send your cash out of town, if that's where the higher yields are found. First Signature Bank & Trust in Portsmouth, N.H., pays 3.28% in a money-market deposit account--almost 37% higher than the national average of 2.39%. Southern Pacific Thrift & Loan Assn. in Culver City, Calif., pays 3.98% on a six-month certificate of deposit and 4.08% on a one-year CD. Both are at least a percentage point over the national average.

There's even a better alternative to the low-yield checking account--United Services Treasury Securities Cash Fund, a money-market mutual that currently pays 2.13%. It isn't guaranteed by the Federal Deposit Insurance Corp.--no mutual funds are--but it invests only in short-term Treasury securities guaranteed by the "full faith and credit" of the government and repurchase agreements, which are short-term borrowings collateralized by Treasury securities. The minimum investment in the fund is $1,000, and investors must also maintain an average monthly balance of $1,000.

Sure, there are money-market funds with higher yields, but United Services Treasury Cash Fund has something most don't--unlimited check-writing privileges, with no minimum on the amount of a check. Most money funds offer checking but require that each check be written for at least $500--making them impractical for everyday transactions.

TAX TRICKS. With careful fund shopping, an investor can bolster the yields from money-market funds. You can eke out 0.20% in yield by switching to a money fund that invests mainly in corporate and bank issues rather than governments. But don't make the switch without weighing the tax consequences. Most government-securities money funds are exempt from state and local income taxes, while conventional money funds--and bank accounts--are not.

The Permanent Portfolio Treasury Bill Fund takes a different tack. It converts ordinary income into capital gains. The fund invests like the most conservative of money-market funds--Treasury bills only--but unlike money funds, it doesn't pay regular dividends and does not maintain the net asset value at $1 per share. The fund is earning 2.41%, a little below what most U.S. Treasury money-market funds yield. But investors who hold their shares for more than a year will reclaim their interest as capital gains. That limits the maximum tax rate to 28%, vs. 39.6% for ordinary income.

Even better than deferring taxes is avoiding them. Investors, if they take a little more risk, can get a lot more return by moving cash into tax-exempt money-market mutual funds. These funds are like regular money-market funds but invest in very short-term municipal paper. Among multistate funds, Strong Municipal Money Market Fund has long been a top yielder. Its 2.49% yield is equal to 3.89% in a taxable fund for an investor in the 36% tax bracket.

High-income investors in high-tax states may want to choose a single-state, tax-exempt money-market fund. They are a bit riskier, since all their holdings are in one state. Still, the yields can more than compensate for a slightly higher risk. A Californian in the highest federal and state income-tax bracket now pays a combined 50% tax on income. The 2.41% yield on the Fidelity Spartan California Municipal Money Market Portfolio amounts to the equivalent of nearly 5% on a taxable investment for a California taxpayer who is in the highest federal and state tax bracket. There is no comparable taxable investment that yields anything that high.

What's crucial in the yield game is not what you earn but what you keep.

LOW RISK:

CLIMBING THE YIELD CURVE

Yield investors may think the fixed-income market an unfriendly place right now. But one facet of that market works in their favor. The "shape" of the yield curve, or the line that's drawn when you connect the dots of the various maturities of bonds, is very friendly to the risk-averse investor. Some of the most attractive rates on the yield curve kick in at the one-to-five-year range.

That's because the curve is "steep"--yields make big jumps from maturity to maturity. A one-year U.S. Treasury bill, now yielding 3.63%, may look paltry, but step out a little bit on the curve, and by comparison, a two-year Treasury note, at 4.2%, is downright sweet.

Move out to three years, and the investor earns 4.57%--almost a percentage point over the one-year bill. Or think of it this way: Choosing the three-year Treasury note over the three-month Treasury bill boosts income by 43%. In fact, some analysts believe that any Treasury note up to about five years' maturity--a 5.16% yield--is a generous deal.

An even smarter way to play the government-bond market is through prerefunded municipal bonds. The "pre-re" was created in recent years as interest rates tumbled. Unable to retire the bonds, the municipalities issued new ones with lower rates and set aside some of the proceeds to buy enough U.S. government bonds to pay off the remaining interest and principal on the munis. The pre-re's income comes from a cache of U.S. bonds, but it's still tax-exempt to the bondholder.

The pre-re may well be one of the best bond investments, taxable or tax-exempt. For most investors, the tax-equivalent yields on pre-res beat anything available in U.S. government securities. Look at a prerefunded issue of the Metropolitan Sanitary District of Greater Chicago. The bonds were originally set to mature in 2001, but because of refunding, will be redeemed in four years. The interest and principal no longer depend on the finances of the authority but on the government bonds that are in escrow. The yield to maturity is a tax-free 4.25%, while Treasury notes of similar maturity would fetch almost 5%. To the investor in the 36% tax bracket, that prerefunded muni offers the equivalent of 6.64%. Yields are so generous that even an investor in the 28% tax bracket would come out ahead.

Hugh R. Lamle, the head of fixed-income and quantitative analysis at M.D. Sass Investors Services, says pre-res are better than AAA-rated munis and insured munis. "Triple-A bonds can be downgraded," he notes, "but a pre-re can't." And insurance is only as good as the insurer. "You're well-covered if a single issuer defaults," he says. "But I would be concerned if there were widespread defaults."

LOOK TWICE. At first glance, pre-res may not look attractive. Since their interest payments were set when rates were far higher, the bonds sell well above par. Go back to the Chicago sanitary district bonds. The annual interest rates amounts to 7.7%, or $77 per $1,000, which was the market rate when the bonds were issued in 1986. Because of the high coupon, that bond now sells for 113, or $1,130. The current yield, about 6.8%, is nearly double what a four-year issue would pay if the bond were issued anew.

So what's the rub? A guaranteed $130 loss? Not really. You get less back at redemption, but because of the high coupon, you get more than your share of interest with every coupon payment. In effect, you're getting a piece of your principal, too.

Beyond Treasuries and some selected municipal bonds, most low-risk investors could benefit best by placing their money in a short-term-bond fund. These funds keep the portfolio maturities in the two-to-four-year range, so market-price fluctuation caused by interest-rate swings should be kept to a minimum.

Many of the short-term funds have other bells and whistles that keep their yields several percentage points above the Treasury yield curve. They feed their investors' cravings with yield enhancers such as premium coupon bonds or inverse floaters that actually increase their payments as interest rates decline.

But be forewarned that the highest-yielding funds may not be the funds with the highest total return. Yield-enhancement strategies are not foolproof. Inverse floaters can plunge in value if rates creep up, and premium bonds erode net asset value as they mature toward par. The Scudder and Strong short-term-bond funds, for instance, had 8% yields during 1992 but suffered losses in net asset value. Still, their total returns were well that of a three-year Treasury. But funds don't necessarily need yield boosters to make money. The Vanguard Short-Term Corporate Fund had only a 6.4% yield, but coupled with a small measure of appreciation, earned a 7.3% total return.

Short-term, tax-free funds usually provide yields more in line with the general level of interest rates. Now, most of the short-term, tax-free funds yield only 3% to 3.5%. While that may be attractive to the high-tax-bracket crowd, this is where investors may opt for the taxable, which yields almost twice as much.

MODERATE RISK:

INCOME DOESN'T HAVE TO BE FIXED

Here's a notion that will set the most diehard coupon clipper's teeth on edge: Buy stocks. Not Boston Chicken or Starbucks, which sell at astronomical multiples of earnings. But good, sensible companies that pay relatively high dividends and thus have a lower volatility than the stock market in general. They fit well into the portfolios of those fixed-income investors who are willing to take a moderate amount of risk for a potentially higher reward.

Indeed, a mix of good dividend-payers can add something to a portfolio of moderate-risk bonds. Because profitable companies increase dividends over time, stocks can add incremental income. A fixed-income portfolio is exactly that: fixed.

True, bonds have delivered super returns for the past few years, mainly because interest rates plunged. But if interest rates stay stable, what you see right now is all you're going to get.

Of course, stocks are more volatile than bonds. But if investors have a longtime horizon, buying stocks for yield is an attractive alternative. Consider that Bristol-Myers Squibb sells at 603/8, with an annual dividend of $2.88 per share. That's a 4.8% yield, almost the same as that of a four-year Treasury note. Buy Bristol, and collect a dividend for four years. If the drugmaker's stock is higher than it is now--a reasonable assumption--you've come out ahead.

That could have been said about IBM several years and dividend cuts ago. Investors need to diversify--not only among different stocks but across industries. Industries where dividends are above average include banking, drugs, energy, and utilities (table, page 146).

Electric utilities have long been a favorite for their high yields. Richard C. Young, an investment adviser who publishes the Intelligence Report, is one of a growing number of pros wary of electrics. "Regulators are getting tougher, and utilities face big liabilities from decommissioning nuclear plants," says Young. Instead, he recommends natural gas and telephone utilities for dividend growth and some preferred stocks for current yield.

PAPER STEW. For investors who would rather buy a mutual fund of dividend-paying stocks, there are plenty to choose from. Most equity-income funds fit the bill: They generate income by investing in equities with above-average yields. They also sprinkle their portfolios with bonds, preferred stocks, and convertible securities that can turn into common stock if the company does well.

That's the strategy of the Lindner Dividend Fund, which recently reopened to new investors. It shut its windows in March because it was swamped with new money and what portfolio manager Eric Ryback thought was a dearth of good places to invest it. Today, he says, he's finding more opportunities. The fund sports a 6.5% yield.

While high-yielding stocks will likely work better in the long haul, many yield-seekers are concerned with bolstering income. With that in mind, the 10-year Treasury bond, with a 5.83% return, looks good--and is perhaps a better buy than the 30-year bond, which yields less than half a percentage point higher but is riskier. If rates rise, the market value of the 30-year bond will fall almost twice as fast as the 10-year bond because of its longer maturity.

Mutual funds that invest in government-backed mortgage securities should also fare well. As interest rates plunged, many of the funds were hurt when hordes of homeowners refinanced and repaid their mortgages. But should interest rates remain fairly stable, mortgage funds should deliver higher than Treasury yields without undue risk. "We buy government-agency paper that has a higher interest rate than the 30-year bond but has an average life of only three to five years," says Worth Bruntjen, who runs Managers Intermediate Mortgage Fund.

Bruntjen also bolsters returns by using mortgage instruments that pay either interest or principal only. True, some money managers, and indeed some big Wall Street trading firms, have lost bundles trading these derivatives, but Bruntjen has used them with aplomb. So far this year (through Oct. 31), the fund has earned 12.4%, nearly double the mortgage-fund average. The fund's current yield is 8.25%.

PRIME TIME. Perhaps even more alluring than fixed-income mutual funds are closed-end bond funds. They differ from mutual funds in that they do not take in new money or redeem shares. Instead, fund shares trade like stocks. Closed-end fund guru Thomas J. Herzfeld says the funds have been hit by a wave of selling, driven by the uptick in interest rates and by yearend portfolio shuffling. "It's bargain time for the funds," says Herzfeld. "The risk-reward relationship is very favorable."

The most attractive closed-end funds are those that sell at a discount to the value of their portfolios. Buying them at discount is like buying a bond that's selling below par. The yield is higher, since investors have to lay out less money for the same payout. That has led to rates of 8.7% on MFS Charter Income Trust and 8.2% on MFS Governments Market Income Trust, both taxable funds, and 7.2% on Municipal Income Opportunity Trust II and 6.9% on ACM Municipal Securities Income Fund, both tax-free.

In addition, says Herzfeld, the discount is likely to narrow or disappear, adding a capital gain to the investment as well. What if the discount fails to narrow or even widens? No problem, he adds. "A big discount is an embarrassment to the managers, and they'll do something about it," says Herzfeld. "The management could buy back shares or merge it into a mutual fund." Any way you slice it, these closed-ends are a risk that is worth taking.

HIGH RISK:

DON'T BURN YOUR FINGERS

At the depths of the depression in junk bonds in 1990, it seemed as if investors in American Standard Inc.--the nation's largest manufacturer of toilets--had flushed their money down the you-know-what. Junk bonds issued to finance American Standard's 1988 leveraged buyout were down 17%, more than offsetting their 12% coupon.

Today, American Standard investors are, well, flush with success. The bonds recently earned an upgrade from Standard & Poor's Corp. They've recovered all their lost value yet yield a healthy 10%--making them a tempting buy for yield-parched investors. American Standard's porcelain-solid indebtedness is an example of the opportunities facing income-seeking investors who are willing to take on a bit more risk. "There are plenty of companies out there with stable cash flow, management with an incentive to get rich, and uniqueness to the product or resistance to economic pressure"--the hallmarks of a top-drawer junk-bond company, notes Richard S. Swingle, who runs the T. Rowe Price High-Yield Fund. American Standard meets all those criteria, and it is one of the more visible holdings of Swingle's fund, which is up 20% this year.

Sure, there are plenty of caveats for risk-seekers. The difference between a risky investment and an unwise one can be subtle (page 150). But investors should take more risk, particularly when it comes to junk bonds and the funds that buy them. "In recent years, high-yield mutual-fund sales have comprised only 3% of all fund sales--so they're just a blip on the horizon," notes Martin Fridson, chief high-yield analyst at Merrill Lynch & Co. That's a shame, because junk is likely to do well at a time when inflation and rates are low and the economy shows signs of recovering.

BAD RAP? High-yield funds such as the ones offered by Invesco, T. Rowe Price, and Vanguard are probably the best way to buy into junk bonds. Junk funds provide diversification while sparing you the high transaction costs and steep bid-ask spreads that are the bane of folks who buy individual junk bonds. Except for the most liquid issues, spreads of as high as three to four percentage points are not uncommon.

Buying into a fund can get you a swell yield--8.1% is the average nowadays--with less volatility than you might think. According to Morningstar Inc., the standard deviation--a measure of volatility--of junk funds averaged about 2.1% over the past decade, even taking into account the 10% decline suffered by junk funds in 1990. That makes junk funds less volatile than plain-vanilla equity income funds, which have a reputation for being far less risky.

Mortgage-backed securities are another potential source of nifty yields. Such securities are backed by home mortgages, and the risk you run is that homeowners will refinance when rates drop. But there's less refinancing risk for securities yielding at the prevailing rates, which are about 6.5%. Another rule of thumb is to buy mortgage-backed securities at par or below. High-rate issues trade at above par, but you get paid back at par when people refinance.

Real estate investment trusts also offer swell yields, but the pitfalls can be significant, too. Many REITs coming on the market nowadays are issued by developers cashing out of their crummiest properties. The payouts to investors--6% or so--are not so hot by real estate standards. REIT mutual funds pay out even less, 5% or below. Still, REIT funds are the safest way to play the REIT game. The worst way is to buy one of the higher-yielding REITs, which pay out 10% or better but usually have the least desirable properties.

Foreign bonds are another tempting but hazardous prospect. This is one area into which it is foolhardy for individual investors to venture without the protection of mutual funds. Currency risk tends to be muted in these funds because of hedging, but hedging cuts into yield. And tracking overseas economies is tough for most individuals. It's easy to be tempted by the 81/2%-yielding Spanish government bonds--until you realize that the Spanish economy has a core inflation rate of more than 5%. That makes the real interest rate 3%, which you can get on these shores.

So unless you're a matador of international finance, stick with high-yielding investments that you can understand. American Standard may not be the epitome of glamour, but it would sit well in most portfolios.

UNACCEPTABLE RISK:

CROSSING INTO THE DANGER ZONE

In the search for high yields, the traps are sometimes obvious. It doesn't take a PhD in finance to see that a junk bond yielding 25% is probably just a tad risky. But often the distinction between taking an acceptable risk--and cruising for a bruising--can be exceedingly fine.

Mortgage-backed securities are a good example. Exotic collateralized mortgage obligations--CMOs--confound even pros and are clearly unsuitable for individuals. Such "derivative" mortgage securities divvy up the principal and interest cash flows from a pool of mortgage loans. The result is a dizzying array of securities that differ in yield, quality, and liquidity. But simple mortgage-backed securities can also be treacherous. A Fannie Mae 30-year mortgage-backed issue yielding 9%, for example, is more desirable than a Fannie Mae 30-year mortgage-backed issue yielding 6.5%, no? Positively, definitely no, asserts Quirsfeld at IDS.

The not-so-hidden peril here is prepayment risk. Borrowers with 9% mortgages are refinancing as fast as they can, which means that owners of the 9% issue are seeing their holdings rapidly liquidate. That's no big deal if they bought the issue at par, 100. But they lose out if they bought at the current price, 106, because investors are repaid at par when homeowners refinance.

Investors in individual junk bonds face a different problem: lack of liquidity. With trading volume low, spreads between the bid and ask price of three to five percentage points are common for small quantities of junk bonds, turning a 12% yield into as little as 7%--meaning you would be better off with a junk-bond fund. An individual bond can be held to maturity, but don't count on that happening. "There's a tendency for high-yield bonds to be retired long before maturity," says Fridson.

One longstanding yield trap is the junkiest of junk--unrated issues, or issues rated CCC or worse by Standard & Poor's or one of the other rating agencies. The average yield for such issues is 14.5%, with some a lot higher. Because of the danger of default, such bonds should only be bought as part of a diversified junk portfolio.

Another example of the pitfalls facing yield-seeking investors can be found in the slew of "certificates" peddled to small investors by equipment-leasing and mortgage-finance companies. There are, for example, the ones offered by Equipment Leasing Corp. of America (ELCOA) and sold to small-fry investors nationwide. The certificates may seem like bank CDs and are available for as little as $100, but they offer rates between 7% and 9.5%. They're underwritten by a tiny Pennsylvania brokerage, Welco Securities. ELCOA uses the money from the certificates to fund its leasing operations.

Here the risks are as subtle as Mt. Vesuvius. Among other things, the parent company of ELCOA, Walnut Equipment Leasing Co., is in such bad shape that its ability to continue doing business is in doubt--and Walnut's demise could force ELCOA's liquidation, according to the

ELCOA prospectus. Kenneth S. Shapiro, ELCOA's vice-president (and Welco's president, and Walnut's vice-president), agrees that there are substantial risks--but notes, correctly, that they are fully disclosed in the company's prospectus.

The pitfalls in the hunt for yield are usually far less obvious than the red flags raised by ELCOA. Investors are being cheated by themselves--by not reaching for higher yields. The era of high inflation is over and won't be with us again for a long time. Low rates are a fact of life. It's time to learn to live with them and reap the harvest of yield.TREASURES FOR

MODERATE RISK-TAKERS

TAXABLE MUTUAL FUNDS

LINDNER

DIVIDEND 6.50%

MANAGERS

INTERMEDIATE MORTGAGE 8.25

STRATTON MONTHLY

DIVIDEND SHARES 5.80

WPG GOVERNMENT

SECURITIES 5.85

TAX-FREE FUNDS

FIDELITY AGGRESSIVE

TAX-FREE 5.57%

T. ROWE PRICE TAX-FREE

HIGH-YIELD 5.84

SIT 'NEW BEGINNING'

TAX-FREE INCOME 5.57

VANGUARD MUNICIPAL

INTERMEDIATE 4.50

TAXABLE CLOSED-END FUNDS

ACM MANAGED

MULTI-MARKET 7.9%

MFS CHARTER

INCOME 8.7

MFS GOVERNMENT

MARKET INCOME 8.2

PUTNAM INTERMEDIATE

GOVERNMENT INCOME 6.9

TAX-FREE CLOSED-END FUNDS

ACM MUNICIPAL

SECURITIES INCOME 6.9%

MUNICIPAL INCOME

OPPORTUNITY II 7.2

NUVEEN PREMIUM

INCOME 4 6.4

SELIGMAN QUALITY

MUNICIPAL 6.2

DATA: MORNINGSTAR INC., THOMAS J. HERZFELD & CO., BUSINESS WEEK

SEEKING HIGHER YIELDS THROUGH STOCKS

Price Yield

HIGH-YIELD COMMON STOCK

ATLANTA GAS LIGHT 35 1/8 5.9%

ATLANTIC RICHFIELD 109 5.1

BRISTOL-MYERS SQUIBB 60 3/8 4.8

CALIFORNIA WATER SERVICE 39 4.9

FIRST HAWAIIAN 24 1/4 4.6

GTE 36 5/8 5.1

PORTLAND GENERAL 19 3/8 6.2

ROYAL DUTCH PETROLEUM 101 1/4 4.1

SCE 19 7/8 7.1

TEXAS UTILITIES 43 1/8 7.1

PREFERRED STOCK

BARNETT BANKS PF. C 66 1/4 6.0

FEDERAL PAPER BOARD PF. A 50 1/4 5.7

GLENDALE FEDERAL BANK PF. E 23 3/8 9.9

MORGAN STANLEY PF. C 26 1/2 8.3

ROYAL BANK OF SCOTLAND PF. C 26 3/8 9.0

DATA: BUSINESS WEEK SURVEY OF ANALYSTS AND PORTFOLIO MANAGERS, BRIDGE

INFORMATION SYSTEMS INC.

THE BEST NO-RISK

INVESTMENTS

UNITED SERVICES

TREASURY SECURITIES

CASH FUND 2.13%

Allows unlimited check-writing with no minimum size; substitute for checking

account

PERMANENT PORTFOLIO

TREASURY BILL FUND 2.41%

Unusual structure turns current income into capital gains for favorable tax

treatment

STRONG MUNICIPAL

MONEY-MARKET FUND 2.49%

Consistently one of the highest-yielding tax-free money funds

6- AND 12-MONTH

CERTIFICATES OF DEPOSIT 3.98%

SOUTHERN PACIFIC

THRIFT & LOAN

CULVER CITY, CALIF. 4.08

Highest yields on federally insured deposits

DATA: MONEY FUND REPORT, BANK RATE MONITOR, BUSINESS WEEK

GOOD YIELDS

WITH LOW RISK

U.S. TREASURY NOTES

TWO-YEAR 4.20%

THREE-YEAR 4.57

FOUR-YEAR 4.90

FIVE-YEAR 5.16

-- No credit worries

-- Exempt from state and local income taxes

-- Little risk from rising rates

PREREFUNDED

MUNICIPAL BONDS

ARLINGTON (TEX)

GENERAL OBLIGATION BOND

To be refunded

May, 1997 4.13%

METROPOLITAN SANITARY DISTRICT

OF GREATER CHICAGO

To be refunded Jan., 1998 4.25

ATLANTA

GENERAL OBLIGATION BOND

Due Dec., 2003 4.85

-- Up to 10 years to call or maturity

-- Backed by U.S. Treasury or agency bonds

-- Great buy-and-hold investments

-- Yields can be more than 80% of a high-grade taxable bond

SHORT-TERM BOND

MUTUAL FUNDS

FIDELITY

SHORT-TERM BOND 4.71%

T. ROWE PRICE

SHORT-TERM BOND 5.69

SCUDDER

SHORT-TERM BOND 5.66

STRONG

SHORT-TERM BOND 6.50

VANGUARD FIXED-INCOME

SHORT-TERM CORP. 4.81

-- No-load funds

-- Can usually beat Treasuries by adding corporates and mortgage-backed

securities

-- Some principal may be at risk

DATA: J.J. KENNY CO., BW

A HIGH-RISK SAMPLER

Investment class Yield

INDIVIDUAL JUNK BONDS 9.8%*

-- High bid-ask spreads can

decimate yields

-- Hold-till-maturity strategies don't work, since most junk is restructured